Week Thoughts: MLPs Pause for Annual Beauty Contest

MLPs were flattish this week, along with the stock market, oil prices, and interest rates. Natural gas prices and propane declined sharply, however, which helped upstream MLPs and small caps under-perform. There were no significant midstream announcements this week, but plenty among upstream MLP activity, including equity and more consolidation.

Weekly Review_5-22-15

The Last NAPTP Conference Ever

NAPTP announced this week that it will change its name from the National Association of Publicly Traded Partnerships to the MLP Association (press release). That means next year, when management teams, investors, bankers, attorneys and research analysts mix in Orlando at the annual conference, it will be called the MLPA Conference.

The highlight of the conference for me was the excitement of the crowded bar packed with plenty of Houstonians watching the Rockets’ James Harden fail to get a shot off at the end of game 2 of the NBA Conference Finals against Golden State. The collective frustration was something you might see at a crowded sports book in Vegas on the first weekend of the NCAA tournament. Would have been better had the Rockets pulled it out, but it was probably the biggest collection of pro Houston fans in the state of Florida on that particular night.

Mixed Sentiment on Commodities, Focus on Backlogs

Perhaps appropriately, the weather this week oscillated between heavy rain and blinding sunlight. MLP investors seemed focused on the status of backlogs and execution of announced projects, and less focused on the impact of lower commodity prices on current results. There are still wide gaps of opinion on whether we see $70/bbl or $40/bbl first.

In that uncertain environment, the MLP sector should continue to provide opportunities for stock picking. Also, the current environment is the most competitive I can remember among MLPs vying for attention from investors, and I expect certain MLPs to see renewed investor interest in the next few weeks after their appearance at the annual MLP beauty contest.

There were less conversations about who might be the next to try to collapse their IDRs than I would have expected, and more discussions about which hyper-growth drop-down MLP would be the first to use their cost of capital advantage to aggressively pursue acquisitions of lower multiple MLPs.

Panels Instructive

The tax panel was interesting, and provided excellent color and detail on the state of the proposed IRS rules. The main takeaways I had from that discussion was that there are far more questions than answers and the process to reach the final regulations could take a year. That uncertainty doesn’t help some MLPs, and might slow the IPO market for non-traditional MLPs in the meanwhile.

The buy-side panel focused on midstream MLPs’ history of maintaining distributions in past commodity down cycles, and their history of bouncing back hard from prior corrections. Also, there were IDR apologists on the panel that seemed to believe these recent IDR collapsing consolidations (KMI, WMB, CEQP) as simply the inevitable final chapter for a successful MLP, rather than a reason to pressure new MLPs to curb the self-imposed problem of IDRs limiting growth over time. That’s logical, given how well many institutions have done by owning publicly-traded GPs over the years.

Finally, it was great to mingle among readers of mlpguy.com, thanks for the ongoing support and feedback.

Winners & Losers

WLKP rallied hard this week, with management at the conference outlining all the efforts the MLP is taking to change the proposed regulations and outlining its intention continue with business as usual in the meanwhile. EROC rallied Friday on the buyout announcement, but not close to the price implied by the buyout. CAPL (mis-labeled as LGP below) rallied despite not attending the MLP conference.

Top5Bottom5_5-22-15

On the downside, upstream MLPs were pushed lower by equity issuance from LINE and ARP this week, and probably weren’t helped by weaker natural gas prices. Despite the pipeline rupture and oil spill, PAA did not make the bottom 5, and was down less than 2% on the week.

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Year to Date

Year to date, WLKP climbed up a few spots this week after a disastrous few weeks. CAPL climbed out of the bottom 5 altogether this week, replaced by ARP. On the upside, DKL popped into the top 5, displacing EXLP, but no other changes at the top.

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General Partner Holding Companies

GPs underperformed the AMZ this week overall, dragged down by weakness in the more commodity sensitive GPs. EXH led the way after under-performing last week. EQGP showed strength late in the week after their first public appearance since the successful IPO a few weeks ago.

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News of the (MLP) World

No significant midstream transactions this week on the equity or M&A front, but don’t expect that to continue next week. MLPs generally like to keep bankers busy on long weekends, and I’m sure there are junior bankers working right now on a few things we can expect to hear about next week, including at least one IPO.

News-of-the-World

Equity

  • Linn Energy (LINE) priced public offering of 16.0mm units at $11.79/unit, raising $188.6mm in gross proceeds (press release)
    • Overnight offering, priced at 5% discount to prior closing price, and traded down an additional 4.2% in the session following pricing
    • Use of proceeds: to reduce borrowings and for general purposes
  • Atlas Resource (ARP) priced public offering of 6.5mm units at $7.97/unit, raising $51.8mm in gross proceeds (press release)
    • Overnight offering, priced at 5.1% discount to prior closing price, and traded down an additional 4.6% in the session following pricing
  • MPLX filed equity distribution agreement to sell up to $500mm worth of common units at the market (filing)
  • Western Refining Logistics (WNRL) filed S-3 to register up to $1.0bn worth of debt and equity securities (filing)
  • Global Partners (GLP) filed equity distribution agreement to sell up to $50mm worth of common units at the market (filing)

M&A / Growth Projects

  • Vanguard Natural Resources (VNR) announced acquisition of Eagle Rock Energy (EROC) for approximately $614mm (press release)
    • VNR will acquire all common units of EROC at an exchange rate of 0.185 VNR units per EROC unit ($3.05 implied value), and VNR will assume $140mm of EROC debt
    • Purchase price implied premium of 24%, EROC units traded up 11.8% on the next session
    • This deal comes just a months after VNR acquired LRR Energy (LRE) for $539mm, and represents a continued consolidation trend among troubled upstream MLPs
    • There are only 8 E&P MLPs remaining, down from 14 at the peak
    • I will not be writing a post-mortem on EROC’s history and contributions to the MLP sector, but maybe when there are only 5 left, I can recap the history of this corner of the MLP space
  • Atlas Resource (ARP) announced acquisition of Arkoma assets from sponsor Atlas Energy Group (ATLS) for $35.5mm (press release)

Other

  • A pipeline in California owned by Plains All American (PAA) ruptured and released 2,500 barrels of oil, including 500 barrels into the Pacific Ocean (Wall Street Journal)
  • Magellan Midstream (MMP) announced resignation of CFO Michael Osborne (press release)
Category MLP Market Post